Spotlight Exclusives

Winning the War: Poverty from the Great Society to the Great Recession

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With today۪s release of Census Poverty Data, it is clear that few measures of U.S. economic performance receive greater attention and scrutiny than the poverty rate. The official poverty rate, reported today to be 15 percent of Americans in 2012, suggests that deprivation has become more widespread over the past four decades. The rate in 2012 was 2.4 percentage points higher than in 1970 despite a doubling of real GDP per capita and trillions of dollars spent on anti-poverty programs. Pundits and academics often rely on these numbers as the benchmark indicator of trends in poverty and draw important conclusions from them.

Trends in official poverty inform the conventional wisdom that U.S. policy has made little progress in reducing poverty, that the panoply of income-support programs, from food stamps to unemployment insurance, have been ineffective. In a recent budget committee meeting, Representative Paul Ryan stated forcefully, “The fact is, we۪re losing the War on Poverty.” This claim is hardly new. In his last State of the Union address, President Reagan said, “We fought a war on poverty, and poverty won.” This line of argument has led several pundits to call for abandoning the safety net.

The problem with this conclusion is that it۪s based on a measure with well-known flaws. Two shortcomings, in particular, have resulted in a measure that dramatically understates our progress. First, the official measure accounts for inflation using the Consumer Price Index (CPI), a benchmark that is slow to incorporate new consumer products, misses changes in the quality of goods, and doesn۪t fully reflect the low prices at big-box stores like Walmart. Although these lower prices should make it easier to get out of actual poverty, their absence from the CPI causes the government to overstate inflation and keep official poverty thresholds higher than they should be. Correcting for this bias results in a poverty rate that declined by nearly 10 percentage points more than the official rate over the 1960s and 1970s. Since 1980, this “corrected” measure declined a further 2.9 percentage points while the official measure has risen 2.1 percentage points.

Second, Census poverty figures are based on a narrow measure of income that often poorly reflects an individual۪s true economic circumstances. That is, an individual۪s income may put that person below the poverty line, according to the Census measure. But that measure ignores the direct effects of some of the most critical anti-poverty weapons, most notably the Earned Income Tax Credit, the Child Tax Credit, Medicaid, food stamps, and housing subsidies. Such programs are an increasing share of the nation۪s anti-poverty efforts.

However, even a broader measure of income that incorporates these programs is not an accurate metric for economic well-being; some individuals who are clearly well-off may have low income. For example, a college student from a wealthy family who lives off campus with little-to-no earnings could be considered poor even while living in a high-end condo and driving a luxury car. A better way to reflect the material circumstances of the disadvantaged is to look at their spendingthat student with extravagant expenses would not be classified as poor under a consumption-based measure.

Figure 1: Official and Alternative Income Poverty Rates and Consumption Poverty Rate, 19602010.

Source: Meyer, Bruce and James Sullivan (2012). Winning the War: Poverty from the Great Society to the Great Recession. Brookings Papers on Economic Activity. P 153.

Why has poverty declined over the past five decades? Some of the credit goes to changes in government policy. Changes in tax policy specifically, cuts in tax rates at the bottom in the 1960s and the expansion of tax credits, deductions, and exemptions starting in the mid-1980s have helped to reduce poverty, particularly for families with children. Rising Social Security benefits also played an important role, particularly for older individuals in the late 1960s and early 1970s. Other cash and non-cash government anti-poverty programs have only had a small impact since 1980. This isn۪t to say that food stamps or housing subsidies don۪t lift many out of poverty. It۪s just that the fraction of people that are lifted out by these programs isn۪t noticeably higher today than it was a few decades ago. Beyond government policies, much of the credit for declining poverty goes to an expanding economy, which has improved the living standards throughout the income distribution.

To be sure, there are still far too many families struggling to make ends meet. But the first step in designing policies to improve their economic circumstances is to recognize the progress that has been made thus far in this hard-fought war.

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Bruce Meyer is a professor at the Harris Graduate School of Public Policy Studies at the University of Chicago.

James Sullivan is an associate professor of economics at the University of Notre Dame.

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